Economics and Business

Enron

What was Enron?

Enron was a high-flying energy trading and communications company headquartered in Houston, Texas. It was the seventh-largest corporation in the United States, a favorite on Wall Street, and for six years in a row (1996–2001) was named America’s Most Innovative Company by Fortune magazine. Then Enron filed for Chapter 11 bankruptcy in December 2001, rocking the business world and shocking investors and rank-and-file employees. It was, for a short time, the largest bankruptcy in American history. Federal investigators later learned that the company’s collapse was caused by fraudulent accounting practices that allowed Enron to overstate earnings and hide debts: the conglomerate had booked billions in profits that did not really exist and created mythical companies to bury heavy losses. Enron’s stock price plummeted, there were massive layoffs, employee retirement accounts (heavily invested in Enron stock) were decimated, executives resigned, and criminal indictments followed. Its accounting firm, Chicago-based Arthur Anderson, collapsed under the weight of its involvement in the scandal.

Enron soon became emblematic of a much larger problem, the so-called “breakdown of corporate America.” It was the first of several colossal business failures, the biggest of which was the collapse of telecom giant WorldCom. In July 2002 WorldCom, valued at $180 billion and serving 15 million customers at its 1999 peak, filed for bankruptcy. WorldCom eclipsed Enron to earn the dubious title of largest bankruptcy in U.S. history. Again, fraudulent business practices were to blame. In March 2005 a federal jury convicted former WorldCom Inc. CEO Bernard Ebbers of engineering $11 billion in fraud. He was also found guilty of conspiracy and of filing false financial reports. The conviction was critical to prosecutors in a host of pending cases connected to corporate scandals, including Enron, whose former chairman, Kenneth Lay, and former CEO, Tom Skilling, were awaiting trial (set for 2006).

A Fortune magazine writer reflected on the crisis of corporate ethics, saying, “Phony earnings, inflated revenues, conflicted Wall Street analysts, directors asleep at the switch—this isn’t just a few bad apples … [it is] a systemic breakdown.” Enron happened to be first, and it became the symbol for the many. In 2005 Enron was in the process of distributing remaining assets to creditors and liquidating other operations. WorldCom, meanwhile, emerged from bankruptcy in 2004 as MCI Inc., the name of one of its subsidiaries.